Penny stocks can have a place in a well-diversified portfolio. They’re higher risk, but the returns can be explosive.
Here, I’m going to highlight two top penny stocks on the London Stock Exchange. In my view, these shares have bags of potential.
In a strong position
First up is hVIVO (LSE: HVO).
It’s a small healthcare company that offers services for clinical trials and lab testing. Playing a vital role in the pharma industry, it serves several of the world’s largest global biopharmaceutical companies.
A recent trading update from hVIVO was very positive.
For starters, the company said that right now, it’s in its “strongest ever position” with 90% of 2024 revenue guidance already contracted, and record revenue visibility into 2025. For 2024, it expects to achieve revenue of £62m (+11% year on year)
Secondly, it advised that it’s on schedule to open a new state-of-the-art facility in Canary Wharf, London, in the first half of the 2024. This will enable the company to meet the growing demand for human challenge trials and allow it to further scale up. By 2028, it is hoping to be generating revenues of £100m per year.
I am excited about 2024 as we look forward to our move to a larger facility and the further diversification of our services.
Dr Yamin ‘Mo’ Khan, CEO of hVIVO
At present, hVIVO shares trade on a forward-looking price-to-earnings (P/E) ratio of around 23. This above-average valuation does add some risk.
Given the strong growth the company is generating right now, however, I think the overall risk/reward skew is attractive.
Taking a long-term view, I think the stock is likely to move higher.
Unlocking new opportunities
The other penny stock I want to highlight is Netcall (LSE: NET).
It’s a technology company that specialises in artificial intelligence-powered process automation and customer engagement software. Its customers include Legal & General, Nationwide, and the NHS.
This company has a great growth track record. Over the last five years, its revenue has grown from £21.9m to £36m (+64%) as organisations have embraced its automation solutions. And looking ahead, analysts expect the top-line growth to continue with a figure of £39.1m forecast for the year ending 30 June 2024 and £43.4m estimated for the following year.
It’s worth noting that management was quite bullish in a recent trading update. “We remain well positioned as we enter the second half, with our innovative product roadmap continuing to unlock new opportunities in a structurally-growing market,” said CEO James Ormondroyd.
Now, this stock has a higher valuation too. Currently, the forward-looking P/E ratio here is about 31.
I don’t think that’s unreasonable given that the technology company is growing rapidly and has a lot of recurring revenues.
But it does add some risk to the investment case. If growth slows, the stock could be volatile.
